A Bruising Battle Over Bonds

By ANISE C. WALLACE

Published: November 27, 1988

JOHN J. CREEDON is not a man who makes hyperbolic statements. But the chairman of the Metropolitan Life Insurance Company is angry and mincing no words. In explaining the lawsuit he recently filed against F. Ross Johnson, chief executive of RJR Nabisco Inc., Mr. Creedon said he is sending a message to corporate executives and investment bankers who, in his words, ''rape'' bondholders.

''It's time somebody blew the whistle and said, 'Is this what we want in our financial markets?' '' said Mr. Creedon, whose company has a $25 billion corporate bond portfolio.

Such inflammatory talk is unusual in the bond markets, but this month emotions have run high. Mr. Creedon and other bondholders claim that they have been abused by corporate executives and Wall Street bankers swept up in the debt-crazed takeover binge. They believe that shareholders are profiting at their expense, reaping huge premiums as bond values plummet under the weight of staggering new debt loads.

Steps are being taken to protect bondholders from such shocks in the future, but many investors and market experts say that the changes may not be enough. Some corporations that want to raise money in the bond markets, for example, are being forced to include such protective covenants as ''super poison puts'' in their trust agreements. The puts would guarantee that bondholders could return the bonds to the issuer at par (the issue price), under certain circumstances.

But these devices will not solve all the problems, say some portfolio managers. And obviously what protections they offer will benefit only the holders of new bonds. They will do nothing, the managers say, to insure the value of the $150 billion of bonds that have been issued by blue-chip corporations and are held by pension funds and individual investors.

Indeed, many bond experts suspect that this is only the beginning of what will be a long battle among bondholders, corporations and investment bankers. ''Frankly I don't think the last shot has been fired,'' said Curtis R. Welling, a managing director and co-head of the capital markets group at the First Boston Corporation.

ULTIMATELY, some of the experts say, the uncertainty will end only when the buyouts themselves die out, either from market forces or new legislative and regulatory curbs.

For now, though, uncertainty reigns. The market for bonds of high-quality consumer products companies has slowed to a crawl as a result of the RJR Nabisco battle, which subsequently attracted other buyers like Kohlberg, Kravis, Roberts & Company and First Boston. (Bonds for manufacturing, financial and utility companies have been relatively unscathed.) In that battle, bonds of RJR Nabisco with a par value of $100 plunged to about $71, from $85, after a management group led by Mr. Johnson and Shearson Lehman Hutton Inc. proposed a leveraged buyout. At the same time, the price of the stock climbed to as high as $89, from $55.

And just as important, the fear rippled throughout the bond markets. Individual investors, who have invested $9 billion in mutual funds that own high-grade corporate bonds, and institutional investors like the North Carolina State Pension Fund have suffered huge paper losses. Worried that other high-quality companies will be acquired in highly leveraged deals, investors have knocked down prices of bonds of such consumer giants as Ralston Purina, Procter & Gamble and Sara Lee.

Prices of industrial revenue bonds of municipalities that are tied to corporate financing also have fallen.

And junk-bond investors are concerned that the financing needed for giant takeovers might overwhelm the high-yield market.

''There's beginning to be a sense that this has gotten out of hand,'' said Morey W. McDaniel, chief finance counsel of the Union Carbide Corporation, who has published a paper on buyouts and bondholders.

Of course, this is not the first time that bondholders have been hurt in a corporate takeover battle or other restructuring heavily dependent on debt. During the battle with the Campeau Corporation earlier this year, the bonds of Federated Department Stores fell more than 17 percent, according to dealers at First Boston. A Market Paralysis

But the magnitude of the battle for RJR Nabisco - whose price may climb to $26 billion - paralyzed the market for bonds of consumer companies because investors realized that almost no company was safe from a buyout. Moreover, the participation of investment banks as investors in the transaction has galvanized many institutional investors. This time, they are considering boycotts against the investment banks that also are major Wall Street bond firms.

The outrage of institutional investors is similar to the complaints by stock investors last spring who threatened to stop doing business with Wall Street firms that use their own principal in program-trading accounts.

''We're hearing a lot of grumbling,'' said an executive at one Wall Street bond firm. The grumbling was loud enough to result in the formation of the Institutional Bondholders Rights Association earlier this year, even before the RJR Nabisco battle began. The group was formed by a group of investors led by Richard S. Swingle, a vice president at T. Rowe Price Associates in Baltimore, and Madeline E. Glick, founder of M.E.G. Asset Management in New York.